Insatiable. That’s the word investors and developers use to describe the appetite for new office development in downtown Calgary. The city’s core absorbed a whopping eight million square feet during the last building cycle, cut short by the 2008–09 recession. The stragglers from that boom are just now opening their doors. Yet the city enters 2013 with a vacancy rate of only 0.5% for AA space, and an overall downtown vacancy rate of 5%.
Prominent pension funds stand ready to finance a new crop of buildings. A new tower at Ivanhoe Cambridge’s Eighth Avenue Place alone will bring another 835,000 square feet to the market. If all the planned towers come to fruition, Calgary will get another three million square feet by 2016. But will the market continue to absorb the space?
There’s no secret as to what’s driving the demand. Calgary’s talk of diversification notwithstanding, “the downtown office market is predominantly occupied by companies tied directly to the energy sector,” says Arthur Lloyd, executive vice-president with Ivanhoe Cambridge. “The commodity price of oil and natural gas is and will continue to be a major factor.”
But it’s not just oil prices driving the expansion. Because companies are extracting publicly owned resources, they have to file piles of paperwork before they can do pretty much anything. Those regulatory demands, coupled with the industry’s capital requirements, employ an ever-growing army of not just engineers and geologists but bankers, lawyers and accountants. When the boom is on, the energy industry is one big white-collar make-work project.
All those people need to work somewhere. But do they need to work downtown? The recent decisions by Canadian Pacific Railway and Imperial Oil to relocate to office parks in the suburbs suggest not. “That’s a new track for Calgary tenants,” says Brett Miller, president of Jones Lang LaSalle Real Estate Services. More companies may follow suit, deciding that the downtown prices—second highest in the country behind Toronto—simply aren’t worth it.
The CP and Imperial moves are among the reasons Miller is now “quite cautious” about where the market will be in two years. Energy companies’ current expansion, he says, is the result of decisions made two or more years ago, when governments were pushing stimulus spending, China’s appetite for natural resources seemed limitless and U.S. energy independence sounded laughable.
Developers, however, continue to bet on the job-creating and space-devouring machine. “We are cautiously optimistic, but have learned that Calgary seems to regularly outperform market expectations,” says Lloyd, noting that Ivanhoe’s new edifice is fully pre-leased. “It is sustainable, but probably not at the same pace that we have noticed over the last development cycle.”